For the first time this week, the major indices are not set to gap higher at the open. There have been four straight days of strong opens and steady strength. There has been practically no weakness.
Strong trending action of this sort is not that unusual, but what was unusual this week was that the blaring headlines about the spread of the coronavirus have been completely ignored by the market.
Reuters is reporting Friday morning that the majority of U.S. firms that maintain operations in China are expecting a drop in revenue due to the virus, with around a quarter of the firms forecasting a drop of at least 16% and another quarter expecting a drop of 11% to 15%.
There is little question that there is going to be some economic fallout, but the market simply has not reacted to that concern. Many market players attribute the strength to central banker action that is providing even more cheap capital. The bottom line is that there continues to be a substantial amount of buying power holding up stocks -- and it doesn't appear to be disappearing despite the negative news headlines.
Market players have been forced to reconcile extreme market strength with the very negative news flow. Many are shaking their heads at how the price action has stayed so strong, but the dynamic that is at work is that the strength feeds the belief that the news really isn't so bad. The market believes price action is a better indication of reality than the news reporting, which is so often considered to be 'fake' these days.
This sort of market action is a particularly good illustration of why I so often preach that it is better to react to changing market conditions rather than to try to anticipate that a change is going to occur. The easiest trade in the world is to anticipate that the coronavirus is going to have a negative impact on the market, but if you had anticipated that scenario, then you have paid a heavy price in the short term.
My approach is to stay vigilant and not try to predict if and when there will be some impact from the virus on the market. Wait for a shift in the price action before becoming more negative. You may be caught by surprise when a sudden reversal does occur, but the likelihood is that you will still be ahead of the game by staying with the trend much longer than anticipatory bears.
There is already some bounce in the early going and there are only minor losses in the indices at this point. There has been a series of weak Fridays this year and it is likely traders are looking for that theme to continue.